overseas tax residency criteria

[tom13s]

Dear all, I currently live with my family and work in the UK as a freelance consultant through my one-man limited company. In a few years as my kids grow up and get independent, my wife and I plan to move out of the UK and live somewhere in the Mediterranean coast. The actual destination country is yet to be decided but it will be one of the EU country: Portugal / Spain / France / Italy / Croatia / Grice / Cyprus. We will initially rent a place there before buying anything and we plan to keep our house in the UK and will probably come to visit 3 - 4 times a year and stay for 2-3 weeks each time.
I plan to continue working but will close my limited company in the UK and will register a new company in our chosen destination in accordance with the local rules and regulations.
I understand to stop being liable for taxes in the UK I will have to terminate tax residency here in the UK and establish one in the destination country. To stop being tax resident in the UK we will have to inform HMRC and meet the criteria. Based on the HMRC guideline we would automatically stop being tax residents if we
a) stay in the UK less than 16 days in the tax year
b) work full time overseas (averaging at least 35 hours a week), spend fewer than 91 days in the UK of which up to 30 days working
The first test a) is not going to apply as we will be more than 16 days in the UK in any tax year.
The second test b) seem okay – we can make sure not to exceed 91/30 days limits but it is not clear if my freelance work will meet the requirement. I understand this rule is more designed for people who found a standard full-time job overseas and will have to go there to perform it. On the other hand, I would bring my job with me; I could continue working in the UK, but I’ll choose to do it elsewhere. I work significantly more than 35 hours a week but being a consultant there some peaks and throughs in my workload. I will probably slow down a bit but still will work full time.
And here are my questions:
- if I work as a self-employed or establish an equivalent of the limited company in the destination country and hire myself (in accordance with the local rules and regulations at my destination country) would I meet the non-resident test for tax purposes?
- If so, do I need to keep the record of the time worked and would 35hours/week rule apply only to the chargeable time to my clients or also, admin, business development etc.?
- Do I need to somehow provide this information to HMRC or just have the record ready in case I am asked?

[AGoodman]

"work" includes self-employment. it could just be harder to demonstrate hours worked.

I don't understand why you've focused on these two automatic tests. You should easily be able to become non-resident under the ties test.

If you kept a house here (accommodation) but avoided 40 days work here (the work test) you should only have two ties initially (accommodation and 90 day) and so could spend up to 90 days in the UK per year as a "leaver".

You'd want to take a careful look at the split year tests if you wanted to leave mid-year. You'll probably also want to check the double tax treaties/rules to avoid double taxation as the tax years will not be the same.

https://www.gov.uk/hmrc-internal-manuals/residence-domicile-and-remittance-basis/rdrm11000

i'd recommend getting some proper advice on the first year to make sure everything matches up and you aren't caught by any quirks of the rules.

[tom13s]

Thanks for the reply.
I focus on the automatic test because they are cleaner cut. The other criteria seem messy and open for interpretation (or perhaps I am a bit paranoid).
Just looking at the flowchart provided on the KPMG website https://assets.kpmg.com/content/dam/kpmg/pdf/2016/01/statutory-residence-test-flowchart.pdf which nicely illustrates the subject.
If we don’t pass automatic non-residence test, we may fall into automatic resident test i.e. all homes (the only home) in the UK and more than 30 days in this home. Or will the rented accommodation overseas be also classes as “home overseas”? If so, are there any specific requirements e.g. minimum length of lease agreement etc., or would short term rentals be sufficient? As mentioned, we are not decided on the country yet and even when we will select the country, we plan to explore it a bit before we settle. For example, if we decided for northern Italy, we would like to spend for 3 months in Airbnbs in Turin, Milan, Bolognia and Genoa before we decide on something more permanent. I couldn’t find any guidelines on how would such rented accommodation be considered HMRC!?
Now even if I can successfully demonstrate second home outside the UK in the destination country then my ties with the UK would be:
- tax resident in the UK in the previous 3 years (for the first three years living abroad)
- UK resident family – it is reasonable to assume at least one of our daughters will live and study/work in the UK
- Accommodation in the UK
- More than 91 days in the UK previous two years (for the first two years)
If the KPMG flowchart is correct, then this would suggest we can stay in the UK for up to 45 days. That is probably okay with careful planning, but the automatic test would offer more flexibility (up to 90 days in the UK) and convenient will not have to warry about accommodation rules and requirements (not for the UK tax purposes anyway). The home and address requirements overseas for the tax purposes may come into picture for the destination country but this is all separate story – at least we will not need to warry about residency there as we have dual nationality with one of the EU countries.
We will certainly get a professional advice closer to the day. It is still 3 – 5 years before we move so the rules can change a bit between now and then. Also, we need to decide first on our destination country first. For the moment I’m just trying to exploring the option to have a better picture before we contact anyone for a specific professional advice.

[tom13s]

Please excuse my dyslexia – just noticed a few typos in my previous post but unfortunately, I am unable to edit them.
Just to add one more question to the previous post.
How all this works in practice? Say, I satisfy myself that the combination of my ties with the UK, overseas accommodation, days in the UK etc. are all within the rules. Can I send that all to HMRC to get their confirmation and rubber stamp that they agree I am no longer UK resident? Or do I have to collect all evidence and live in fear for the rest of my days that HMRC may start investigation and only then I may find out if they would agree with my reasoning and interpretation?

[AGoodman]

Yes, i can see the problem.

"Home" is not defined so bears its plain english meaning. airbnb is unlikely to qualify although a rented property could - even a sixth month let might qualify if it becomes the family home for that period. there is no bright line distinction so you have to ask yourself whether you would consider the property your "home". Failing that, you could be caught by the automatic UK test for the tax year if you spend a day in your uk home.

Work bears a wide meaning so doesn't require an employment contract but, as mentioned, you need to work the hours and need to keep records to show it. You don't file any records but they would be v useful if HMRC queried your position.

On the ties, only minor children are counted and there are special rules if they remain behind - see rdrm11530. You can see them in the UK up to 60 days without triggering the tie.